AI explained: AI in the UK insurance market

Laura-May Scott and Emily McMahan navigate the intricate relationship between AI and professional liability insurance, offering valuable insights and practical advice for businesses in the AI era.

Our hosts, both lawyers in Reed Smith’s Insurance Recovery Group in London, delve into AI’s transformative impact on the UK insurance market, focusing on professional liability insurance. AI is adding efficiency to tasks such as document review, legal research and due diligence, but who pays when AI fails? Laura-May and Emily share recommendations for businesses on integrating AI, including evaluating specific AI risks, maintaining human oversight and ensuring transparency.

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Transcript:

Intro: Hello, and welcome to Tech Law Talks, a podcast brought to you by Reed Smith's Emerging Technologies Group. In each episode of this podcast, we will discuss cutting-edge issues on technology, data, and the law. We will provide practical observations on a wide variety of technology and data topics to give you quick and actionable tips to address the issues you are dealing with every day.

Laura-May: Welcome to Tech Law Talks and our new series on artificial intelligence. Over the coming months, we'll explore the key challenges and opportunities within the rapidly evolving AI landscape. Today, we will focus on AI in the UK insurance market. I'm Laura-May Scott, a partner in our Insurance Recovery and Global Commercial Disputes group based here in our London office. Joining me today is Emily McMahan, a senior associate also in the Insurance Recovery and Global Commercial Disputes team from our London office. So diving right in, AI is transforming how we work and introducing new complexities in the provision of services. AI is undeniably reshaping professional services, and with that, the landscape of risk and liability. Specifically today, we're going to discuss how professional liability insurance is evolving to address AI-related risks, and what companies should be aware of as they incorporate AI into their operations and work product. Emily, can you start by giving our listeners a quick overview of professional liability insurance and how it intersects with this new AI-driven landscape?

Emily: Thank you, Laura-May. So, professional liability insurance protects professionals, including solicitors, doctors, accountants, and consultants, for example, against claims brought by their clients in respect of alleged negligence or poor advice. This type of insurance helps professionals cover the legal costs of defending those claims, as well as any related damages or settlements associated with the claim. Before AI, professional liability insurance would protect professionals from traditional risks, like errors in judgment or omissions from advice. For example, if an accountant missed a filing deadline or a solicitor failed to supervise a junior lawyer, such that the firm provided incorrect advice on the law. However, as AI becomes increasingly utilized in professional services and in the delivery of services and advice to their clients, the traditional risks faced by these professionals is changing rapidly. This is because AI can significantly alter how services are delivered to clients. Indeed, it is also often the case that it is not readily apparent to the client that AI has been used in the delivery of some of these professional services.

Laura-May: Thank you, Emily. I totally agree with that. Can you now please tell us how the landscape is changing? So how is AI being used in the various sectors to deliver services to clients?

Emily: Well, in the legal sphere, AI is being used for tasks such as document review, legal research, and within the due diligence process. At first glance, this is quite impressive, as these are normally the most time-consuming aspects of a lawyer's work. So the fact that AI can assist with these tasks is really useful. Therefore, when it works well, it works really well and can save us a lot of time and costs. However, when the use of AI goes wrong, then it can cause real damage. For example, if it transpires that something has been missed in the due diligence process, or if the technology hallucinates or makes up results, then this can cause a significant problem. I know, for example, on the latter point in the US, there was a case where two New York lawyers were taken to court after using ChatGPT to write a legal brief that actually contained fake case citations. Furthermore, using AI poses a risk in the context of confidentiality, where personal data of clients is disclosed to the system or there's a data leak. So when it goes wrong, it can go really wrong.

Laura-May: Yes, I can totally understand that. So basically, it all boils down to the question of who is responsible if AI gets something wrong? And I guess, will professional liability insurance be able to cover that?

Emily: Yes, exactly. Does liability fall to the professionals who have been using the AI or the developers and providers of the AI? There's no clear-cut answer, but the client will probably no doubt look to the professional with whom they've contracted with and who owes them a duty of care, whether that be, for example, a law firm or an accountancy firm to cover any subsequent loss. In light of this, Laura-May, maybe you could tell our listeners what this means from an insurance perspective.

Laura-May: Yes, it's an important question. So since many insurance policies were created before AI, they don't explicitly address AI related issues. For now, claims arising from AI are often managed on a case by case basis within the scope of existing policies, and it very much depends on the policy wording. For example, as UK law firms must obtain sufficient professional liability insurance to adequately cover its current and past services as mandated by its regulator, to the solicitor's regulatory authority, then it is likely that such policy will respond to claims where AI is used to perform and deliver services to clients and where a later claim for breach of duty arises in relation to that use of AI. Thus, a law firm's professional liability insurance could cover instances where AI is used to perform legal duties, giving rise to a claim from the client. And I think that's pretty similar for accountancy firms who are members of the Institute of Chartered accountants for England and Wales. So the risks associated with AI are likely to fall under the minimum terms and conditions for its required professional liability insurance, such that any claims brought against accountants for breach of duty in relation to the use of AI would be covered under the insurance policy. However, as time goes on, we can expect to see more specific terms addressing the use of AI in professional liability policies. Some policies might have that already, but I think as we go through the market, it will become more industry standard. And we recommend that businesses review their professional liability policy language to ascertain how it addresses AI risk.

Emily: Thanks, Laura-May. That's really interesting that such a broad approach is being followed. I was wondering whether you would be able to tell our listeners how you think they should be reacting to this approach and preparing for any future developments.

Laura-May: I would say the first step is that businesses should evaluate how AI is being integrated into their services. It starts with understanding the specific risks associated with the AI technologies that they are using and thinking through the possible consequences if something goes wrong with the AI product that's being utilised. The second thing concerns communication. So even if businesses are not coming across specific questions regarding the use of AI when they're renewing or placing professional liability cover, companies should always ensure that they're proactively updating their insurers about the tech that they are using to deliver their services. And that's to ensure that businesses discharge their obligation to give a fair presentation of the risk to insurers at the time of placement or on variation or renewal of the policy pursuant to the Insurance Act 2015. It's also practically important to disclose to insurers fully so that they understand how the business utilizes AI and you can then avoid coverage-related issues down the line if a claim does arise. Better to have that all dealt with up front. The third step is about human involvement and maintaining robust risk management processes for the use of AI. Businesses need to ensure that there is some human supervision with any tasks involving AI and that all of the output from the AI is thoroughly checked. So businesses should be adopting internal policies and frameworks to outline the permitted use of AI in the delivery of services by their business. And finally, I think it's very important to focus on transparency with clients. You know, clients should be informed if any AI tech has been used in the delivery of services. And indeed, some clients may say that they don't want the professional services provider to utilize AI in the delivery of services. And businesses must be familiar with any restrictions that have been put in place by a client. So in other words, informed consent for the use of AI should be obtained from the client where possible. I think these should collectively help, these steps should collectively help all parties begin to understand where the liability lies, Emily. Do you have anything to add?

Emily: I see. So it's basically all about taking a proactive rather than a reactive attitude to this. Though times may be uncertain, companies should certainly be preparing for what is to come. In terms of anything to add, I would also just like to quickly mention that if a firm uses a third-party AI tool instead of its own tool, risk management can become a little more complex. This is because if a firm develops their own AI tool, they know how it works and therefore any risks that could manifest from that. This makes it easier to perform internal checks and also obtain proper informed consent from clients as they'll have more information about the technology that is being utilized. Whereas if a business uses a third-party technology, although though in some cases this might be cheaper, it is harder to know the associated risk. And I would also say that jurisdiction comes into this. It's important that any global professional service business looks at the legal and regulatory landscape in all the countries that they operate. There is not a globally uniform approach to AI, and how to utilize it and regulate it is changing. So, companies need to be aware of where their outputs are being sent and ensure that their risks are managed appropriately.

Laura-May: Yes, I agree. All great points, Emily. So in the future, what do you think we can be expecting from insurers?

Emily: So I know you mentioned earlier about how time progresses, we can expect to see more precise policy. At the moment, I think it is fair to say that insurers are interested in understanding how AI is being used in businesses. It's likely that as time goes on and insurers begin to understand the risks involved, they will start to modify their policies and ask additional questions of their clients to better tailor their covered risks. For example, certain insurers may require that insureds declare their AI usage and provide an overview of the possible consequences if that technology fails. Another development we can expect from the market is new insurance products created solely for the use of AI.

Laura-May: Yes, I entirely agree. I think we will see more specific insurance products that are tailored to the use of AI. So in summary, businesses should focus on their risk management practices regarding the use of AI and ensure that they're having discussions with their insurers about the use of the new technologies. These conversations around responsibility, transparency and collaboration will undoubtedly continue to shape professional liability insurance in the AI era that we're now in. And indeed, by understanding their own AI systems and engaging with insurers and setting clear expectations with clients, companies can stay ahead. Anything more there, Emily?

Emily: Agreed. It's all about maintaining that balance between innovation and responsibility. While AI holds tremendous potential, it also demands accountability from the professionals who use it. So all that's left to say is thank you for listening to this episode and look out for the next one. And if you enjoyed this episode, please subscribe, rate, and review us on your favorite podcast platform and share your thoughts and feedback with us on our social media channels.

Laura-May: Yes, thanks so much. Until next time.

Outro: Tech Law Talks is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's emerging technologies practice, please email techlawtalks@reedsmith.com. You can find our podcasts on Spotify, Apple Podcasts, Google Podcasts, reedsmith.com, and our social media accounts. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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